29 November 2023
So, it's been a few days since the Autumn Statement, an opportune time to look at the market reaction and feedback from experts. It depends on whether your politics lean to the left or right as to what kind of spin you may put on the budget in your mind.
As always, the economy is the key, and while short-term expectations have been increased, the medium-term outlook is challenging. The Office for Budget Responsibility (OBR) increased expectations for 2023 from -0.2% to a rise of 0.6%. Looking further down the line, expectations for 2024 have been reduced from growth of 1.8% down to just 0.7%. Then the following year, a further reduction to 1.4% from 2.5% - which fundamentally weakens the business arena.
Whatever other policies the government introduces, if the economy is not growing at the levels previously expected, this places further pressure across the board. Interestingly, while the short-term expectations have certainly been reined in, business confidence has improved with the release of the monthly PMI data - now above the critical 50 rate.
Reaction in the foreign exchange markets has been muted, with a slight fall and then recovery in sterling. Looking further down the line, Andrew Bailey, the governor of the Bank of England, is set to make a short speech at the 50th anniversary of the London Stock Exchange on Wednesday, 29 November. Details of his speech aren’t available at the time of writing, but it could provide further guidance.
While there has been a degree of disappointment about inflation expectations, which is forecast to fall to 2.8% by the end of 2024 and 2% by mid-2025, this is much better than the recent double-digit figure. Unfortunately, this also supports expectations that interest rates will remain higher for longer than initially expected. There will be pressure on consumer spending and businesses until inflation returns to the Bank of England's 2% target rate. A price worth paying or should the bank have been more flexible?
When you consider that there was a 10.1% increase in the state pension last April, with a further 8.5% increase coming next April, this would appear to be good times for those receiving a state pension. In reality, these rises have just allowed recipients to maintain relative spending power with no real increase. There is also a further issue to consider; the freezing of the income tax bands.
The flat rate for the annual state pension will be £11,501 in the 2024/25 tax year, which is just over £1000 short of the current tax-exempt allowance of £12,570. While there are other income allowances for dividends and interest, an additional job or income from a property or investments will take many people into the next tax band of 20%. So, the headline figures for the state pension make good reading, but the reality will be very different for many people. What is known as “fiscal drag” will allow the government to increase income tax receipts, partially offsetting the cost of an increase in the state pension.
There is no doubt that the forthcoming consultation regarding "pension pots for life" is a very positive move in the long term. As we mentioned in last week's article, the average person will have 12 jobs in their lifetime, meaning they could have 12 different workplace pensions. The ability to collate all of your pension assets into one pot, with regulations obliging your employer to contribute to that one pot, could be a game changer. It will be interesting to see how the pensions industry responds, but initially, the signs have been positive.
On one slightly disappointing note, the government announced a delay in removing the lifetime allowance, which was expected to happen at the start of the 2024/25 tax year. This will likely occur in the following tax year, with concerns about relatively complex rules said to be behind the delay.
The reduction in national insurance will put pounds in the pockets of literally millions of people:-
· £350 a year saving for someone on an average salary of £35,000 a year
· A saving of £754 for someone on £80,000 a year
· Changes for the self-employed will lead to average savings of over £500 a year
Again, these are all funds which will be put back into the pockets of employees and the self-employed. While partly rolling back recent national insurance contribution increases, the headline figures may not be the game changer they may have looked at first glance.
The markets believe this is just stage one of a raft of potential tax cuts ahead of a possible spring election in 2024. While the changes are certainly encouraging, they must be considered against a background of frozen tax allowances and a considerable increase in the cost of living over the last two years – not to mention weak economic growth. Markets were neither impressed nor unimpressed – even though there were some surprises - as we await further updates about the short to medium-term outlook for the UK economy.
In summary – as you were!
+44 (0)20 7048 9400
Email Us
Client login
